Some tax breaks would evaporate in health plan Treatment money won't be shielded from income tax

November 06, 1993|By John Fairhall | John Fairhall,Washington Bureau

WASHINGTON -- One costly element of President Clinton's health care proposal has gone largely unnoticed in the debate thus far: Millions of Americans would lose tax breaks worth hundreds, or even thousands, of dollars if the Clinton reforms become law.

To help finance the costly reforms that aim to offer every American health care insurance, Mr. Clinton wants to eliminate a law allowing millions of middle-income workers to shield part of their earnings from income taxes and use that pre-tax money to pay for health insurance premiums, deductibles and other out-of-pocket health costs.

The elimination of the tax breaks -- in effect a tax increase -- would raise as much as $30 billion of the more than $390 billion costs of the plan, figures the administration.

The value of the tax breaks to individuals varies with circum

stances, but for many people it amounts to a substantial tax savings.

Consider this hypothetical example provided by the accounting firm of Deloitte & Touche: A single mother in Baltimore, who sets aside $1,300 of her $30,000 salary to pay for premiums and out-of-pocket medical expenses, saves $250 in federal and state income taxes and $99 in Social Security taxes -- a total of about $350 a year.

The Treasury Department estimates that 10 million to 15 million people take advantage of these tax breaks, which an increasing number of companies are making available through their benefit plans. Eliminating them would bring the government $30 billion over four years to help pay for the Clinton reform plan, which would guarantee insurance coverage to all Americans by the end of 1997.

Ending the medical-expense break is one of most significant changes in the tax code included in the 1,342-page Clinton reform legislation presented to Congress last month. Some other changes also could increase tax bills, while others would provide new tax breaks.

Administration officials hardly ever talk about the possibility of higher taxes, other than the widely publicized proposal to

increase federal tobacco taxes. Instead, when discussing the financial impact of reform, the officials generally emphasize that most people would pay lower insurance premiums.

Book omits provision

The "Health Security" book produced by the administration, which the president and Hillary Rodham Clinton are urging Americans to read to get the "truth" about the reform bill, doesn't mention the tax impact in the section detailing effects of reform on individuals.

A Treasury spokesman suggested yesterday that part of the reason is that some of the financial details of the reform bill weren't immediately available. He noted that Treasury Secretary Lloyd Bentsen, who testified on the federal costs of the plan this week, had been reluctant to appear before Congress "until the numbers were ready."

The Treasury spokesman cautioned against predicting higher tax bills as a result of health care reform. The impact must be measured on an individual basis, he said, taking into account other changes brought about by health care reform.

Among the proposed new tax breaks for individuals is one that would help the disabled and elderly deduct from their taxes the costs of long-term care and long-term care insurance.

Another would encourage physicians to practice in rural and inner-city areas, by giving them a $1,000-a-month tax credit to serve there. Physician assistants, nurse midwives and nurse practitioners would receive a $500-per-month tax credit, for up to 60 months.

Self-employed people would be permitted to deduct 100 percent of the costs of health insurance premiums, a sharp increase from the current 25 percent rule.

Tobacco, benefits taxed

But other changes would give more money to the government. For example, the tax on cigarettes would increase 75 cents, to 99 cents a pack, and the tax on small cigars would increase from about one-tenth of a cent to nearly 4 cents.

For larger cigars, it would rise from about 13 percent of the sales price to more than 50 percent, up to a maximum of 12 cents per cigar. The tax on snuff would go from 2 cents a tin to more than 80 cents, and the tax on chewing tobacco would increase from 12 cents a pound to $12.63 a pound.

Beginning 10 years after passage of health reform legislation, the administration would end the tax exemption for employer-paid health care benefits. Workers would pay taxes on employer health benefits that supplement those required by the federal government.

Although the Clinton administration's proposed package of benefits is comprehensive -- it includes hospitalization, doctors' care and prescription drugs -- it does not cover eyeglasses for adults, for example. If employers provide this benefit to workers, the benefit would then be treated as taxable income to the employee.

The administration wants some of these tax changes partly to encourage healthier habits among Americans, particularly those involving tobacco use.